The Covid-19 pandemic has caused an enormous amount of pressure and uncertainty to businesses across all industries. Given the strict lockdown rules enforced in many countries and the subsequent closure of physical stores, social media channels have become the medium where businesses have engaged with consumers to market their products.

In turn, consumers across the world are shifting to online shopping faster than ever, which has fuelled a new wave of growth for the e-commerce industry. According to Statista, a world-recognised organisation for business data, over two billion people purchased goods or services online and e-commerce sales worldwide amounted to 4.28 trillion US dollars, a rapid growth of more than 25% comparing to the pre-pandemic figures.

In light of this surging e-commerce trend, we discuss potential taxation issues for e-commerce business owners as they expand offshore through a case study. 

Case study

A local New Zealand company, NZ Cashmere Ltd, decides to promote its cashmere products to the consumers in the US through an online market platform. What are some of the overseas taxation issues this company may face?

New Zealand company sells direct to customer

At this stage NZ Cashmere Ltd sells its goods via an online platform and exports the goods to the end consumer on a FOB (Free on Board) basis. In relation to this business model the following tax obligations need to be considered:

• Does the activity create for the company a US tax presence (referred to as federal tax presence). In our experience, NZ Cashmere Ltd should not have any overseas company tax obligations, although they may be required to notify the IRS of these activities in order to claim tax relief.
• Does NZ Cashmere Ltd have a US sales tax obligation? For example, in the US sales tax is imposed on the sale or lease of goods and services in the US. This type of tax is largely based on the physical nexus test meaning physical business activities create sales tax nexus (i.e. through an office, a store or employees). However, with the explosion of e-commerce, new online sales tax laws were introduced. Broadly, online sellers may now be required to collect sales tax when the business has an economic nexus (essentially meaning making a certain level of sales in a state, either a certain dollar amount or a certain number of transactions) in the same state as the customers. To make matters even more complicated, every state in the US has different nexus requirements and thresholds. Of course, exemptions can apply.
• Does NZ Cashmere Ltd  have a US state tax presence? This is a different concept for New Zealand companies as we do not have states. However for other countries, including the US, this is a further layer of tax that needs to be considered. In general, the concept of state tax is essentially company income tax paid at a state level. This is originally based on the concept of physical nexus, but state tax is also moving towards including an economic nexus requirement in the near future. What this means is that if a business breaches the economic nexus threshold in terms of sales in a state, not only would the business have a sales tax obligation, it should also have a state income tax liability.

Following on from this, if the New Zealand company decides to set up a company in the US, unlike in New Zealand, there is no imputation system in the US to avoid double taxation of business profits, so choosing the correct type of structure is a crucial consideration for the company. Further, given the different tax laws in each state, it is even more important to consider which state would be the best location for incorporation.

In summary, while expanding offshore opens up markets for your business, it comes with a whole new layer of complexity including how you manage your tax obligations. If you need any assistance with respect to tax issues in relation to e-commerce activities, please contact us at Bellingham Wallace.

By Graham Lawrence (Director) and Harriet Zhang (Senior Tax Consultant)